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BRICS make the case for globalization

Andrew Hammond

Contributed to The Globe and Mail

Published August 3, 2017Updated August 3, 2017

Andrew Hammond is an Associate at LSE IDEAS at the London School of Economics.

Trade ministers of the BRICS (Brazil, Russia, India, China and South Africa) finished up a two-day meeting on Wednesday in Shanghai. The session, which comes in advance of the BRICS's ninth annual summit of presidents and prime ministers in September in Xiamen, saw China and the other four powers warn about the dangers of greater protectionism following the election of U.S. President Donald Trump.

This week's forum is not the first time this year China has championed the benefits of market liberalization. In January, Xi Jinping became the first Chinese president to give a speech at the World Economic Forum in Davos, Switzerland, where he made the case for continued economic globalization.

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China's advocacy of this agenda reflects, in large part, the fact it has been a big beneficiary of globalization, with IMF data since 2014 showing that the country's economy is now larger than the United States on the basis of purchasing-power parity. However, a commitment to inclusive growth is another key reason Beijing is hitching its wagon to globalization.

This topic of inclusive growth and the BRICS is especially pertinent given the world is at a potentially pivotal moment in the battle against global economic inequality. Remarkable World Bank research indicates that, for the first time in about two centuries, overall global income inequality – one of, but not the only measure of economic inequality – appears to be declining.

The BRICS, which account for more than 40 per cent of world population, have been the key drivers of this historic movement toward greater overall global income equality. The collective economic growth and very large populations of India and China, in particular, have lifted a massive amount of people out of poverty – an estimated 600 million between 1981 and 2004 in China alone.

This has helped catalyze what Branko Milanovic, who co-authored the World Bank research with Christoph Lakner, asserts is the "profoundest reshuffle of individual incomes on the global scale since the Industrial Revolution."

At the same time, however, there is an opposing force: Growing income inequality within many countries and this issue has become increasingly politically salient. It is the rising inequality in developed markets that gets most attention. Take the United States, for instance, where concerns over inequality and stagnant living standards have led to surging support for some populist politicians, which may have propelled Mr. Trump to the presidency.

These two opposing forces, like tectonic plates, are pushing against each other. While the net global trend for the past 200 years has been toward greater overall income inequality, there is now significant, growing evidence since the turn of the millennium that the "positive effect" of growing income equality between countries, spurred by the development of the global South, is superseding the "negative effect" from increasing inequality within countries.

Monumental as this could be, however, the picture is not yet clear cut. In part, this is because data sources on income across the world are inevitably imperfect, which means conclusions are hedged with uncertainty.

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While more proof is, therefore, needed to judge whether this economic phenomenon is robust and sustainable, what is certain is that the overall lot of the South has improved dramatically, as exemplified by the BRICS over the past generation. The most prominent beneficiaries have been a much heralded "new" middle class – estimated to be as large as a third of the world's population – disproportionately located in key Asian emerging economies such as China, India, and other key countries such as Indonesia.

The World Bank research also indicates that much of the bottom third of the global income hierarchy have also generally benefitted, too. As in China, many other hundreds of millions of people have transitioned from absolute poverty.

However, not all the South has shared fully in this success story, to date at least. Much of Africa, and some of Latin America, for instance, have generally not benefitted as much as Asia.

With the current economic challenges that China and some other key emerging markets – including Brazil and South Africa – are now experiencing, it is unclear whether the development of the global South has enough momentum to keep driving forward a more equitable world order. This will depend, largely, on the same twin issues of whether emerging markets generally continue growing robustly, and also whether the trend toward rising income inequality within countries is sustained.

On the first issue, the trajectory of the global economy will very likely continue to shift toward the South and for the foreseeable future many key emerging markets will probably remain in robust shape. However, the recent remarkable wave of emerging-market growth of the past generation appears now to be decelerating, and the global transformation it has produced in recent years may not be repeated again.

On the latter, it is not set in stone that ever-growing income inequality within countries will continue, especially if there is political and popular will to address it. However, the debate over what long-term reform agenda should be undertaken to tackle this problem is contested by the left and right across much of the world. Taken over all, the BRICs are helping drive what could be the first period of sustained movement toward greater global income equality for two centuries. Yet, the fragile process, fuelled by globalization, could yet go into reverse if emerging-market growth decelerates faster than anticipated and/or income inequality within countries accelerates, undercutting efforts to foster inclusive growth.